Question

(All the questions below are related to each other)

1. You buy an asset with a purchase price of $7,000 and your shipping is $500. It has a 3 year class life. Show a depreciation schedule below that includes both the depreciation each year and the book value each year.

2. If the working capital changes in number 1 are a negative $300 show the depreciation schedule.

3. What is the net working capital change? Accounts receivable increase by $1,000; inventory increases by $2,000; notes payable increase by $4,000.

4. In problem 1, you sell the asset at the end of year 2 for $4,000. What is your gain or loss? Then determine the tax consequence at a tax rate of 34%.

5. Redo number 4 but you sell it for $1,000. Then determine the tax consequence at a tax rate of 34%.

Answer 1

1:

Year	Depreciation rate	Opening Balance	Depreciation	Closing balance
1	33.33%	7500	2499.75	5000.25
2	44.45%	5000.25	3333.75	1666.5
3	14.81%	1666.5	1110.75	555.75
4	7.41%	555.75	555.75	0

2: If the working capital changes are -300, the depreciation schedule will be the same since it is not impacted by working capital.

3: Net Working capital change = Incraese in notes payable -Receivables Increase- Inventory increase

= 4000-1000-2000

= $1000

4: If the asset is sold for $4000, gain is (4000-1666.50) =$2333.50

Tax = 2333.50*34% = 739.39

5: If the asset is sold for $1000, loss = 1666.50 - 1000 = $666.50

Tax = -666.50*34% = -226.61 (Saving)

WORKINGS